McCain's health proposal aims to tackle costs

Tax credits instead of deduction spurs analysts' interest, caution

SAN FRANCISCO (MarketWatch) -- Given the amount of attention focused on the differences between the Democratic presidential candidates' health-care proposals, you might think presumed Republican nominee Sen. John McCain didn't have one of his own.

But he does. As Democratic senators Hillary Clinton and Barack Obama spar over whose proposal would cover more people, McCain has taken a different tack that's in line with a traditional Republican approach, experts say.

He doesn't talk much about universal coverage. Instead, he's said he wants to focus on cost drivers that put coverage out of reach for the 47 million Americans who don't have health insurance and that hit the wallets of those who do.

McCain's proposal aims to rein in rising costs while offering tax credits for individuals to purchase their own health insurance. That sets him apart from past Republican rivals such as former New York Mayor Rudy Giuliani, who favored tax deductions. McCain proposes tax credits of $2,500 for individuals or $5,000 for families as a step toward decoupling health insurance from employment, which is how the majority of Americans get their coverage.

"What I'm excited about is he wants to give Americans control of their health-care dollars and take it away from employers and the government," said John R. Graham, director of health-care studies at the Pacific Research Institute, a nonprofit group that prefers free-market-oriented public policy, in San Francisco.

Details are scant, but McCain lays out his policy ideas in broad terms on his campaign Web site. He supports chronic-disease care, the adoption of generic drugs, greater patient responsibility and the purchase of health insurance across state lines and through any organization or association people choose. He also backs the reimportation of prescription drugs from countries such as Canada and wants more federal research into autism.

His health system reform statement includes a passage that suggests sweeping changes, but the means are unclear: "Controlling health-care costs will take fundamental change -- nothing short of a complete reform of the culture of our health system and the way we pay for it will suffice."

No one from the McCain campaign returned calls seeking clarification.

Tax treatment

The tax-credit idea is one of the most interesting and potentially perilous elements in McCain's proposal, several analysts said. They also warned that allowing consumers to buy health insurance in any state likely would undermine consumer protections that some states have, such as health-plan solvency requirements, guaranteed issue and minimum benefit standards.

A tax credit would be much more valuable to people with low incomes than a tax deduction, said Paul Ginsburg, president of the Center for Studying Health System Change, a nonprofit, nonpartisan research group in Washington.

"McCain is much closer to what policy wonks have been talking about for years," Ginsburg said. "Whereas the other Republican proposals were talking about deductions for health insurance, which frankly would not do the job of expanding coverage because they're worth so little to lower-income people, McCain's has really talked about a tax credit."

Tax credits would do a better job of leveling the playing field between workers, he said. "Low-income people have cheaper health-care policies, if they have them at all, and are in lower tax brackets, if they pay [taxes] at all.... If your goal is to stimulate more people to buy insurance, making it a credit is much more effective."

Still, Ginsburg noted the U.S. has very little experience using tax credits to entice people to buy coverage.

Linda Blumberg, an economist and principal research associate at the Urban Institute's Health Policy Center in Washington, said the proposed tax credits, while more generous than previous Republican credits, are still too financially modest to help low-income people buy adequate policies without state-funded or other assistance.

What's more, if healthy workers take the tax-credit money and buy cheaper coverage in the individual market, their actions may lead to spiraling costs for the remaining older, sicker workers in the employer pool, she said. Those sicker workers then may find themselves unable to secure affordable coverage or any offers of coverage on the individual market if they need it.

"There's a real danger to breaking apart the employer-sponsored insurance market without having adequate protections and reforms and systems in place to catch the people falling out of it," Blumberg said. "That's a tremendous difference between the traditional Republican approach and the proposals coming from Democrats."

By contrast, Clinton and Obama propose purchasing pools and other mechanisms that would spread risk broadly, she said. Tax credits are a feature in Clinton's proposal as well, and both Democratic candidates want to mandate that health insurers accept everyone who applies, even if they're ill. See previous Vital Signs.

Balancing risk

While people like to hear about principles such as freedom and choice, it's not that simple in the health coverage context, Blumberg said. "With insurance, the more flexibility and choice you have, the more selection problems you create."

"Whenever you put a policy in place that reduces the amount of risk-pooling that's required, it does create financial savings for the healthy but at explicit cost to those who are unhealthy," she said.

"To say this is only a positive, to allow this kind of flexibility, is disingenuous," Blumberg said. "It's a positive for people who are healthy at a particular moment. It's clearly a direct cost to people who are unhealthy and need to use medical services more. I think that's the conversation we should be having, frankly. What are our social values? What is it we want to do with our health-care system? It may be the country is willing to sacrifice the less healthy for the healthy, but I don't think we've had the conversation."

"If we're going to transition from employer-based health care to individual health care, you're going to have a whole bunch of people in late middle age who are not healthy getting thrown into the individual market," he said. "We do need a transition plan, and it's not clear to me [McCain has] thought of that."

Last week, Elizabeth Edwards, wife of former Sen. John Edwards, who dropped out of the Democratic presidential race in January, criticized McCain's health plan as inadequate, especially for people with preexisting conditions.

Speaking at the Association of Healthcare Journalists' annual meeting in Arlington, Va., on Saturday, Edwards said neither she, who's fighting breast cancer, nor McCain, who had skin cancer, would be covered under his proposal since health insurers "wouldn't have to cover preexisting conditions like breast cancer and melanoma."

Douglas Holtz-Eakin, one of McCain's senior policy advisers, told the Los Angeles Times that Edwards' comments showed she misunderstood the Arizona senator's plan and failed to grasp "the power of competition to produce greater coverage for Americans," Holtz-Eakin said, according to the L.A. Times.

Concerned that more government involvement in health care would quash innovation and competition, Graham said he favors McCain's approach above those of the Democratic candidates.

"If you allow people to keep their health insurance that is of their choice, you can buy a policy when you're 19 and keep it until you die," he said. "That's one really good thing, and it doesn't expand government programs."

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.